Federal Deposit Insurance Corporation (FDIC).
Notice of proposed rulemaking.
The FDIC is proposing a rule (the proposed rule) that would revise certain provisions of its securitization safe harbor rule, which relates to the treatment of financial assets transferred in connection with a securitization or participation transaction, in order to eliminate a requirement that the securitization documents require compliance with Regulation AB of the Securities and Exchange Commission in circumstances where Regulation AB by its terms would not apply to the issuance of obligations backed by such financial assets.
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Comments on the proposed rule must be received by October 21, 2019.
You may submit comments, identified by RIN 3064-AF09, by any of the following methods:
Agency Website: https://www.fdic.gov/regulations/laws/federal/. Follow instructions for submitting comments on the agency website.
Email: Comments@FDIC.gov. Include RIN 3064-AF09 in the subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m.
Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
Instructions: All comments will be posted without change to https://www.fdic.gov/regulations/laws/federal/, including any personal information provided.
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FOR FURTHER INFORMATION CONTACT:
Phillip E. Sloan, Counsel, Legal Division, (703) 562-6137, psloan@FDIC.gov; George H. Williamson, Manager, Division of Resolutions and Receiverships, (571) 858-8199, GeWilliamson@FDIC.gov.
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I. Policy Objectives
The FDIC is proposing to revise the Securitization Safe Harbor Rule by removing a disclosure requirement that was established by the Rule when it was amended and restated in 2010. As used in this notice of proposed rulemaking (NPR), “Securitization Safe Harbor Rule” and “Rule” refer to the FDIC's securitization safe harbor rule titled “Treatment of financial assets transferred in connection with a securitization or participation” and codified at 12 CFR 360.6.
The Rule addresses circumstances that may arise if the FDIC is appointed receiver or conservator for an insured depository institution (IDI) which has sponsored one or more securitization transactions.
If a securitization satisfies one of the sets of conditions established by the Rule, the Rule provides that, depending on which set of conditions is satisfied, either (i) in the exercise of its authority to repudiate or disclaim contracts, the FDIC shall not reclaim, recover or recharacterize as property of the institution or receivership the financial assets transferred as part of the securitization transaction, or (ii) if the FDIC repudiates the securitization agreement pursuant to which financial assets were transferred and does not pay damages within a specified period, or if the FDIC is in monetary default under a securitization for a specified period due to its failure to pay or apply collections received by it under the securitization documents, certain remedies will be available to investors on an expedited basis.
The FDIC is proposing to remove the requirement of the Rule that the documents governing securitization transactions require compliance with Regulation AB of the Securities and Exchange Commission, 17 CFR part 229, subpart 229.1100 (Regulation AB), which imposes significant asset-level disclosure requirements in circumstances where, under the terms of Regulation AB itself, Regulation AB is not applicable to the transaction. This would mean that, unlike under the Rule as currently in effect, the documents governing a private placement or an issuance not otherwise required to be registered would not be required to mandate compliance with Regulation AB (as currently in effect). This proposal is made in response to feedback that it is difficult for institutions to comply with Regulation AB as applied to certain types of securitization transactions, in particular residential mortgage securitizations. While the SEC has not applied the Regulation AB disclosure requirements to private placement transactions, the Rule has required (except for certain grandfathered transactions) that these disclosures be required as a condition for eligibility for the Rule's benefits. The net effect appears to have been a disincentive for IDIs to sponsor securitizations of residential mortgages that are compliant with the Rule.
The FDIC's rationale for establishing the disclosure requirements in 2010 was to reduce the likelihood of a buildup of structurally opaque and potentially risky mortgage securitizations or other securitizations that could pose risks to IDIs. In the ensuing years, a number of other regulatory changes have been implemented that have also contributed to the same objective. As a result, it is no longer clear that compliance with the public disclosure requirements of Regulation AB in a private placement or in an issuance not otherwise required to be registered is needed to achieve the policy objective of preventing a buildup of opaque and potentially risky securitizations such as occurred during the pre-crisis years, particularly where the imposition of such a requirement may serve to restrict overall liquidity.
Accordingly, the policy objective of the proposed rule is to remove unnecessary barriers to securitization transactions, in particular the securitization of residential mortgages, without adverse effects on the safety and soundness of insured institutions.
The FDIC, in the Securitization Safe Harbor Rule, set forth criteria under which in its capacity as receiver or conservator of an IDI the FDIC will not, in the exercise of its authority to repudiate contracts, recover or reclaim financial assets transferred in connection with securitization transactions. Asset transfers that, under the Securitization Safe Harbor Rule, are not subject to recovery or reclamation through the exercise of the FDIC's repudiation authority include those that pertain to certain grandfathered transactions, such as, for example, asset transfers made prior to December 31, 2010, which satisfied the conditions (except for the legal isolation condition addressed by the Securitization Safe Harbor Rule) for sale accounting treatment under generally accepted accounting principles (GAAP) in effect for reporting periods prior to November 15, 2009, and which pertain to a securitization transaction that satisfied certain other requirements. In addition, the Securitization Safe Harbor Rule provides that asset transfers that are not grandfathered, but that satisfy the conditions (except for the legal isolation condition addressed by the Securitization Safe Harbor Rule) for sale accounting treatment under GAAP in effect for reporting periods after November 15, 2009, and that pertain to a securitization transaction that satisfies all other conditions of the Securitization Safe Harbor Rule (such asset transfers, together with grandfathered asset transfers, are referred to collectively as Safe Harbor Transfers) will not be subject to FDIC recovery or reclamation actions through the exercise of the FDIC's repudiation authority. For any securitization transaction in respect of which transfers of financial assets do not qualify as Safe Harbor Transfers but which transaction satisfies all of its other requirements, the Securitization Safe Harbor Rule provides that, in the event the FDIC as receiver or conservator remains in monetary default for a specified period under a securitization due to its failure to pay or apply collections, or repudiates the securitization asset transfer agreement Start Printed Page 43734and does not pay damages within a specified period, certain remedies can be exercised by investors on an expedited basis.
Paragraph (b)(2) of the Securitization Safe Harbor Rule sets forth conditions relating to the disclosure of information. Under paragraph (b)(2)(i)(A), the documents governing the securitization must require disclosure of information as to the securitized financial assets on a financial asset or pool level and on a security level that, at a minimum, complies with the requirements of Regulation AB, even if the securities issued in the securitization are issued in private placement or are not otherwise required to be registered.
The SEC first adopted Regulation AB in 2004 as a new, principles-based set of disclosure items specifically tailored to asset-backed securities. The regulation was intended to form the basis of disclosure for both Securities Act registration statements and Exchange Act reports relating to asset-backed securities. In April 2010, the SEC proposed significant revisions to Regulation AB and other rules regarding the offering process, disclosure and reporting for asset-backed securities (Proposed Regulation AB). Among such revisions were the adoption of specified asset-level disclosures for particular asset classes and the extension of the Regulation AB disclosure requirements to exempt offerings and exempt resale transactions for asset backed securities. As adopted in 2014, Regulation AB retained the majority of the proposed asset-specific disclosure requirements but declined to require issuers to provide the same disclosure for exempt offerings as is required for registered offerings. The disclosure requirements of Regulation AB vary, depending on the type of securitization issuance. The most extensive disclosure requirements relate to residential mortgage securitizations. These requirements became effective in November 2016.
FDIC staff has been told that potential IDI sponsors of residential mortgage securitizations have found that it is difficult to provide certain information required by Regulation AB, either because the information is not readily available to them or because there is uncertainty as to the information requested to be disclosed and, thus, uncertainty as to whether the disclosure would be deemed accurate. FDIC staff was also advised that due to the provision of paragraph (b)(2)(i)(A) that requires that the securitization documents require compliance with Regulation AB in private transactions, private offerings of residential mortgage backed securitization obligations that are compliant with the Rule are similarly challenging for sponsors, and that the net effect has been to discourage IDIs from participating in the securitization of residential mortgages, apart from selling the mortgages to, or with a guarantee from, the government-sponsored housing enterprises.
In adopting the Securitization Safe Harbor Rule, the FDIC stated that the conditions of the Rule were designed to “provide greater clarity and transparency to allow a better ongoing evaluation of the quality of lending by banks and reduce the risks to the DIF from opaque securitization structures and the poorly underwritten loans that led to onset of the financial crisis.” 
As part of its effort to achieve this goal, the FDIC included paragraph (b)(2) in the Rule, which imposes extensive disclosure requirements relating to securitizations. These requirements include paragraph (b)(2)(i)(A), which mandates that the documents governing a securitization require disclosure of information as to the securitized financial assets on a financial asset or pool level and on a security level that, at a minimum, complies with the requirements of Regulation AB, whether or not the transaction is a registered issuance otherwise subject to Regulation AB.
While the requirement of the Rule that documents governing a private securitization require compliance with the disclosure requirements of Regulation AB differs from the requirements of Regulation AB as adopted by the SEC in 2014, the requirement was consistent with Proposed Regulation AB, which was pending when the FDIC adopted the Rule and proposed that investors in “structured finance products” (which term included private placements of securitization transactions) be entitled to request and receive the information that would be required by Regulation AB in a public transaction. This consistency was emphasized in the preamble to the Final Rule (published on September 30, 2010), which states that the Rule “is also consistent with the amendments to Regulation AB proposed by the Securities and Exchange Commission (“SEC”) on April 7, 2010 (as so proposed to be amended, “New Regulation AB”).” 
After noting that Proposed Regulation AB would establish extensive new requirements for both SEC registered publicly offered securitizations and many private placements, the preamble states “[t]he disclosure and retention requirements of New Regulation AB are consistent with and support the approach of the Rule.” 
A later paragraph of the preamble addresses the same point, and states that, as Proposed Regulation AB governs disclosure for private transactions as well as other issuances, “ the Rule and the SEC's proposed regulations are fully consistent.” 
Subsequently, the SEC finalized Regulation AB to apply only to public issuances. The FDIC is now proposing to modify paragraph (b)(2)(i)(A) of the Rule such that its disclosure requirements are consistent with Regulation AB and are applicable only when disclosure is required by Regulation AB.
The reasons underlying the requirement that private transactions include Regulation AB disclosures have diminished. While the requirement applies to all securitizations, the preamble to the Rule makes clear that the FDIC was focused mostly on residential mortgage securitizations. The preamble states that “securitization as a viable liquidity tool in mortgage finance will not return without greater transparency and clarity . . . [G]reater transparency . . . will serve to more closely tie the origination of loans to their long-term performance by requiring disclosures of performance.” 
In a different paragraph, the preamble refers to defects in many of the subprime and other mortgages originated and sold into securitizations, and states that such originations require attention by the FDIC to fulfill its responsibilities as deposit insurer and that the defects and misalignment of incentives in the securitization process for residential mortgages constituted a “significant contributor to the erosion of underwriting standards throughout the mortgage finance system.” 
The FDIC believes that if, in the midst of the financial crisis, it was appropriate, in crafting an FDIC rule governing when securitization investors are eligible for safe harbor protection, to make applicable to certain transactions SEC disclosure requirements that do not otherwise apply to those transactions, such a requirement is no longer necessary in view of regulatory developments relating to residential mortgages since 2010.
In addition, the specific requirements in paragraph (b)(2), other than paragraph (b)(2)(i)(A), address goals set Start Printed Page 43735out in the preamble to the Rule. Paragraph (b)(2)(i)(B) mandates that the documents governing the securitization require disclosure of numerous matters, including (among others), the capital or tranche structure of the securitization, priority of payments and subordination features, and representations and warranties made with respect to the financial assets. The documents must also require that while the securities are outstanding, the issuer provide information as to the credit performance of the securities and the underlying financial assets, substitutions and removal of financial assets, servicer advances and losses allocated tranches. The documents must also disclose the nature and amount of compensation paid to originators, the sponsor, rating agencies, and certain other parties. In the case of securitizations backed by any residential mortgage, the documents must require disclosure of certain loan level information, such as loan type, loan structure, maturity and interest rate, as well as disclosure of certain interests by servicers, and a requirement that the sponsors affirm compliance with applicable statutory and regulatory standards for the origination of mortgage loans. These additional requirements are not affected by the proposed rule and would remain in effect if the proposed rule is adopted.
IV. Expected Effects
The proposed rule could increase the willingness of IDIs to sponsor the issuance of asset backed securities (ABS) that are exempt from registration with the SEC. Feedback from market participants suggests that the proposed rule may be most likely to affect incentives to issue residential mortgage backed securities (RMBS) that are exempt from registration (henceforth, privately issued RMBS, or private RMBS), since the disclosure requirements of Regulation AB are most extensive for residential mortgages.
If these market perceptions are correct, the proposed rule could result in an increase in the dollar volume of privately issued RMBS, presumably increasing the total flow of credit available to finance residential mortgages in the United States. For context, total issuance of RMBS secured by 1-4 family residential mortgages was approximately $1.3 trillion in 2018.
About $1.2 trillion of this total were agency issuances, issued through the government sponsored housing enterprises, or GSEs: the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae). About $100 billion of RMBS were non-agency issuances. The $100 billion of non-agency issuances would include both securities registered with the SEC (public issuances), if any, and private issuances.
The FDIC cannot readily identify the set of FDIC-insured banks that have sponsored private RMBS. Moreover, for any bank that has sponsored private RMBS, some may have chosen to make the Regulation AB disclosures necessary for the safe harbor, and some may have chosen not to make such disclosures, but instead may have chosen to disclose to investors the risks associated with the exercise of the FDIC's receivership authorities. Information about such disclosure choices made by private RMBS issuers also is not readily available to the FDIC.
The FDIC believes, however, that the number of insured banks sponsoring private RMBS, or any type of private ABS, and thereby directly affected by this proposed rule, is extremely small. In its most recent Information Collection Resubmission request for § 360.6 of the FDIC regulations, the FDIC identified fewer than 20 distinct private ABS issuances of any type sponsored by FDIC insured institutions based on a sample of issuances in 2017, some of which were different issuances by the same banks.
For most of the transactions, the sponsoring banks were very large institutions.
This information appears generally consistent with market participants' observations that current private RMBS activity by insured banks is muted. This would suggest that removing the disclosures might be expected to encourage banks engaging in sponsoring private RMBS issuances to expand their activities. It also is possible that other institutions not currently involved in issuing private RMBS could begin doing so. While the proposed rule could be expected to result in an increase in the dollar volume of private RMBS issuances, the disclosures are only one among many factors affecting the demand and supply of RMBS. Levels of RMBS outstanding suggest that demand for non-agency RMBS is still weak in the aftermath of the crisis.
For all these reasons, the FDIC does not have a basis for quantifying the amount of any increase in RMBS that might result from the proposed rule.
Increased issuance sponsored by insured banks of private RMBS, to the extent it is not offset by corresponding reductions in the amount of mortgages they hold in portfolio, would result in an increase in the supply of credit available to fund residential mortgages. An increase in the supply of mortgage credit would be expected to benefit borrowers by increasing mortgage availability and decreasing mortgage costs. While problematical or predatory mortgage practices can harm borrowers, a significant body of regulation exists to prevent such practices. Given this, it is more likely that any increase in mortgage credit resulting from the proposed rule would be beneficial to borrowers.
Some associated increase in measured U.S. economic output would be expected to accompany an increased volume of mortgage credit. This is in part because the imputed value of the credit services banks provide is a component of measured GDP. The purchase of a new home also may be accompanied by the purchase of other household goods and services that contribute to an increase in overall economic activity.
Institutions affected by the proposed rule would incur reduced compliance costs as a result of not having to make the otherwise required disclosures. Based on the Information Collection Resubmission cited earlier, the reduction in compliance costs associated with the proposed change to part 360 across the FDIC-insured institutions identified as having been involved in private ABS issuances in 2017 would have been about $9.7 million.
To the extent private ABS is being issued now in conformance with the disclosure requirements that would be removed under the proposal, a potential cost of the proposal is that the information available to investors about the credit quality of the assets underlying these ABS could be reduced. As a general matter, a reduction in information available to investors can result in a less efficient allocation of credit and increased risk of potential losses to investors, including banks. A related potential cost is that if privately placed securitization products were to become more widespread and risky as a result of the proposed rule, the vulnerability of the mortgage market to a period of financial stress could increase. In this respect, a significant part of the problems experienced with RMBS during the crisis were attributable to the proliferation of Start Printed Page 43736subprime and so-called alternative mortgages as underlying assets for those RMBS. The FDIC believes that a number of post-crisis regulatory changes make it unlikely that substantial growth of similar types of RMBS would occur again.
V. Request for Comment
The FDIC invites comment from all members of the public on all aspects of the proposed rule. Comments are specifically requested on whether the proposed rule is consistent with the purposes of section 360.6 and whether the results intended to be achieved by the proposed rule will be and should be achieved as set forth in the proposed rule or by way of different modifications to the Securitization Safe Harbor Rule. The FDIC will carefully consider all comments that relate to the proposed rule.
VI. Administrative Law Matters
A. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (44 U.S.C. 3501, et seq.) (PRA) the FDIC may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid Office of Management and Budget (OMB) control number.
As discussed above, the FDIC proposes to revise certain provisions of its securitization safe harbor rule, which relates to the treatment of financial assets transferred in connection with a securitization or participation transaction, in order to eliminate a requirement that the securitization documents require compliance with Regulation AB of the Securities and Exchange Commission in circumstances where Regulation AB by its terms would not apply to the issuance of obligations backed by such financial assets.
The FDIC has determined that this proposed rule would revise an existing collection of information (3064-0177). The information collection requirements contained in this proposed rulemaking will be submitted by the FDIC to OMB for review and approval under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and § 1320.11 of the OMB's implementing regulations (5 CFR 1320.11).
The FDIC proposes to revise this information collection as follows:
Title of Information Collection: Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection with a Securitization or Participation After September 30, 2010.
OMB Control Number: 3064-0177
Affected Public: Insured Depository Institutions.
| ||Type of burden||Estimated number of respondents||Estimated number of responses
number)||Estimated time per
response||Estimated frequency||Frequency of response||Total annual estimated burden
|Private Transactions—Non Reg AB Compliant||Disclosure||0||1.895||37||12.0||Monthly||0|
|360.6(b)(2)(ii)(C )||Disclosure||1||6.000||1||1.0||On Occasion||6|
|Total Disclosure Burden||219|
|Total Recordkeeping Burden||69|
Comments are invited on: (a) Whether the collection of information is necessary for the proper performance of the FDIC's functions, including whether the information has practical utility; (b) the accuracy of the estimates of the burden of the information collection, including the validity of the methodology and assumptions used; (c) ways to enhance the quality, utility, and clarity of the information to be collected; (d) ways to minimize the burden of the information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. All comments will become a matter of public record.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in connection with a proposed rule, an agency prepare and make available for public comment an initial regulatory flexibility analysis describing the impact of the rulemaking on small entities.
A regulatory flexibility analysis is not required, however, if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. The Small Business Administration (SBA) has defined “small entities” to include banking organizations with total assets less than or equal to $550 million.
Generally, the FDIC considers a significant effect to be a quantified effect in excess of 5 percent of total annual salaries and benefits per institution, or Start Printed Page 437372.5 percent of total non-interest expenses. The FDIC believes that effects in excess of these thresholds typically represent significant effects for FDIC-supervised institutions. For the reasons described below and under section 605(b) of the RFA, the FDIC certifies that this proposed rule will not have a significant economic effect on a substantial number of small entities.
The FDIC supervises 3,489 depository institutions,
of which 2,674 are considered small entities for the purposes of RFA.
The proposed rule will only affect institutions currently engaged in arranging, issuing or acting as servicer for privately placed securitizations of asset-backed securities, or likely to do so as a result of the proposed rule. The FDIC knows of no small FDIC-insured institution that is currently acting in this capacity. The FDIC believes that acting as arranger, issuer or servicer for privately placed ABS requires a level of resources and capital markets expertise that would preclude a substantial number of small FDIC-insured institutions from becoming involved in these activities.
Accordingly, the FDIC concludes that the proposed rule will not have a significant impact on a substantial number of small entities. For the reasons described above and pursuant to 5 U.S.C. 605(b), the FDIC certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities. The FDIC invites comments on all aspects of the supporting information provided in this RFA section. In particular, would this rule have any significant effects on small entities that the FDIC has not identified?
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act 
requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The FDIC has sought to present the proposed rule in a simple and straightforward manner, and invites comment on the use of plain language. For example:
- Has the FDIC organized the material to suit your needs? If not, how could this material be better organized?
- Are the requirements in the proposed rule clearly stated? If not, how could the rule be stated more clearly?
- Does the proposed rule contain language or jargon that is unclear? If so, which language requires clarification?
- What else could the FDIC do to make the proposed rule easier to understand?
D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act (RCDRIA), in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions, each federal banking agency must consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on insured depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations.
In addition, section 302(b) of RCDRIA requires new regulations and amendments to regulations that impose additional reporting, disclosures, or other new requirements on insured depository institutions generally to take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form.
The FDIC has determined that the proposed rule would not impose additional reporting, disclosure, or other requirements; therefore the requirements of RCDRIA do not apply. However, the FDIC invites any comments that will inform its consideration of RCDRIA.
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- Bank deposit insurance
- Holding companies
- National banks
- Reporting and recordkeeping requirements
- Savings associations
Authority and Issuance
For the reasons set forth in the preamble, the Federal Deposit Insurance Corporation proposes to amend 12 CFR part 360 as follows:
PART 360—RESOLUTION AND RECEIVERSHIP RULES
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1. The authority citation for part 360 continues to read as follows: End Amendment Part
Start Amendment Part
2. Revise § 360.6(b)(2)(i)(A) to read as follows: End Amendment Part
Treatment of financial assets transferred in connection with a securitization or participation.
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(b) * * *
(2) * * *
(i) * * *
(A) In the case of an issuance of obligations that is subject to 17 CFR part 229, subpart 229.1100 (Regulation AB of the Securities and Exchange Commission (Regulation AB)), the documents shall require that, on or prior to issuance of obligations and at the time of delivery of any periodic distribution report and, in any event, at least once per calendar quarter, while obligations are outstanding, information about the obligations and the securitized financial assets shall be disclosed to all potential investors at the financial asset or pool level, as appropriate for the financial assets, and security-level to enable evaluation and analysis of the credit risk and performance of the obligations and financial assets. The documents shall require that such information and its disclosure, at a minimum, shall comply with the requirements of Regulation AB. Information that is unknown or not available to the sponsor or the issuer after reasonable investigation may be omitted if the issuer includes a statement in the offering documents disclosing that the specific information is otherwise unavailable;
* * * * *
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Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on July 16, 2019.
Robert E. Feldman,
[FR Doc. 2019-15536 Filed 8-21-19; 8:45 am]
BILLING CODE 6714-01-P